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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended November 29, 2003
Commission File Number 1-8504
UNIFIRST CORPORATION
(Exact name of registrant as specified in its charter)
Massachusetts 04-2103460
(State of Incorporation) (IRS Employer Identification Number)
68 Jonspin Road
Wilmington, Massachusetts 01887
(Address of principal executive offices)(Zip Code)
Registrant's telephone number: (978) 658-8888
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes [X] No [ ]
The number of outstanding shares of UniFirst Corporation Common Stock and Class
B Common Stock at January 5, 2004 were 9,010,979 and 10,175,144 respectively.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UniFirst Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
NOVEMBER 29, AUGUST 30, NOVEMBER 30,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2003 2003 2002
---------------------------------------------------------------------- ------------ ---------- ------------
Assets
Current assets:
Cash and cash equivalents $ 7,988 $ 6,053 $ 484
Receivables, less reserves of $3,113, $2,611,and $2,953,
respectively 77,627 57,941 63,384
Inventories 31,601 25,355 21,860
Rental merchandise in service 68,744 60,490 59,401
Prepaid and deferred tax assets 5,591 5,591 --
Prepaid expenses 515 407 586
--------- --------- ---------
Total current assets 192,066 155,837 145,715
--------- --------- ---------
Property and equipment:
Land, buildings and leasehold improvements 234,483 221,487 214,182
Machinery and equipment 255,286 238,820 230,952
Motor vehicles 66,991 66,081 64,019
--------- --------- ---------
556,760 526,388 509,153
Less - accumulated depreciation 261,097 251,806 238,759
--------- --------- ---------
295,663 274,582 270,394
--------- --------- ---------
Goodwill 180,263 62,608 61,535
Intangible assets, net 57,877 20,524 21,734
Other assets 4,164 1,036 2,332
--------- --------- ---------
$ 730,033 $ 514,587 $ 501,710
========= ========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Current maturities of long-term obligations $ 1,673 $ 2,493 $ 2,710
Notes payable -- 104 1,299
Accounts payable 31,982 30,678 28,703
Accrued liabilities 71,528 53,670 55,389
Accrued and deferred income taxes 7,622 -- 2,015
--------- --------- ---------
Total current liabilities 112,805 86,945 90,116
--------- --------- ---------
Long-term obligations, net of current maturities 237,951 67,319 70,259
Deferred income taxes 33,727 24,943 27,004
--------- --------- ---------
Shareholders' equity:
Preferred stock, $1.00 par value; 2,000,000 shares authorized;
none issued -- -- --
Common stock, $.10 par value; 30,000,000 shares
authorized; shares issued 10,606,034, 10,599,359, and
10,555,109, respectively 1,061 1,060 1,055
Class B common stock, $.10 par value; 20,000,000 shares authorized;
issued and outstanding 10,175,144, 10,175,144, and
10,205,144, respectively 1,018 1,018 1,021
Treasury stock, 1,595,055, 1,595,055, and 1,595,055 shares
respectively, at cost (26,005) (26,005) (26,005)
Capital surplus 12,789 12,693 12,519
Retained earnings 356,923 348,043 329,373
Accumulated other comprehensive loss (236) (1,429) (3,632)
--------- --------- ---------
Total shareholders' equity 345,550 335,380 314,331
--------- --------- ---------
$ 730,033 $ 514,587 $ 501,710
========= ========= =========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
2
UniFirst Corporation and Subsidiaries
Condensed Consolidated Statements of Income
(Unaudited)
Thirteen weeks Thirteen weeks
ended ended
November 29, November 30,
(In thousands, except per share data) 2003 2002
- ----------------------------------------------------------- -------------- --------------
Revenues $ 180,898 $ 149,179
--------- ---------
Cost and expenses:
Operating costs 115,088 92,690
Selling and administrative expenses 36,827 31,899
Depreciation and amortization 11,028 9,884
--------- ---------
162,943 134,473
--------- ---------
Income from operations 17,955 14,706
--------- ---------
Other expense (income):
Interest expense 3,242 1,094
Interest income (292) (268)
Interest rate swap income (480) (209)
--------- ---------
2,470 617
--------- ---------
Income before income taxes 15,485 14,089
Provision for income taxes 5,962 5,424
--------- ---------
Income before cumulative effect of accounting change 9,523 8,665
Cumulative effect of accounting change (net of income tax
benefit of $1,404 in fiscal 2003) -- 2,242
--------- ---------
Net income $ 9,523 $ 6,423
========= =========
Weighted average number of shares outstanding - basic 19,184 19,218
--------- ---------
Weighted average number of shares outstanding - diluted 19,249 19,271
--------- ---------
Income per share - basic:
Income before cumulative effect of accounting change, net $ 0.50 $ 0.45
Cumulative effect of accounting change, net -- (0.12)
--------- ---------
Net income per share $ 0.50 $ 0.33
========= =========
Income per share - diluted:
Income before cumulative effect of accounting change, net $ 0.49 $ 0.45
Cumulative effect of accounting change, net -- (0.12)
--------- ---------
Net income per share $ 0.49 $ 0.33
========= =========
Cash dividends per share:
Common stock $ 0.0375 $ 0.0375
========= =========
Class B common stock $ 0.0300 $ 0.0300
========= =========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
UniFirst Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Thirteen Thirteen
weeks ended weeks ended
November 29, November 30,
(In thousands) 2003 2002
- -------------------------------------------------------------- ------------ ------------
Cash flows from operating activities:
Net income $ 9,523 $ 6,423
Adjustments:
Cumulative effect of accounting change, net -- 2,242
Depreciation 9,491 8,522
Amortization of intangible assets 1,537 1,362
Amortization of deferred financing costs 290 --
Accretion on asset retirement obligations 96 75
Interest rate swap income (480) (209)
Changes in assets and liabilities, net of acquisitions:
Receivables (10,327) (8,798)
Inventories 3,098 2,947
Rental merchandise in service 4,390 (3,355)
Prepaid expenses 947 (270)
Accounts payable (3,427) 11,690
Accrued liabilities 2,139 (2,376)
Accrued and deferred income taxes 5,671 1,964
--------- --------
Net cash provided by operating activities 22,948 20,217
--------- --------
Cash flows from investing activities:
Acquisition of business (175,628) --
Capital expenditures (6,747) (8,998)
Other (2,317) (1,167)
--------- --------
Net cash used in investing activities (184,692) (10,165)
--------- --------
Cash flows from financing activities:
Increase in debt 177,293 104
Reduction of debt (9,590) (12,127)
Deferred financing costs (3,478) --
Repurchase of common stock -- (1,249)
Proceeds from exercise of common stock options 97 16
Cash dividends (643) (645)
--------- --------
Net cash provided by (used in) financing activities 163,679 (13,901)
--------- --------
Net increase (decrease) in cash and cash equivalents 1,935 (3,849)
Cash and cash equivalents at beginning of period 6,053 4,333
--------- --------
Cash and cash equivalents at end of period $ 7,988 $ 484
========= ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
UniFirst Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Thirteen Weeks Ended November 29, 2003
(Amounts in thousands, except per share and common stock options data)
1. Summary Of Critical and Significant Accounting Policies
Business Description
UniFirst Corporation (the "Company") is a leading company in the garment service
business. The Company designs, manufactures, personalizes, rents, cleans,
delivers and sells a variety of superior quality occupational garments, career
apparel and imagewear programs to businesses of all kinds. It also services
industrial wiper towels, floor mats and other non-garment items and provides
first aid cabinet services and other safety supplies. The Company's UniTech
subsidiary decontaminates and cleans, in separate facilities, garments which may
have been exposed to radioactive materials.
Interim Financial Information
These condensed consolidated financial statements have been prepared by the
Company without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations; however, the Company believes that the information furnished
reflects all adjustments (consisting only of normal recurring adjustments) which
are, in the opinion of management, necessary to a fair statement of results for
the interim period. It is suggested that these condensed consolidated financial
statements be read in conjunction with the financial statements and the notes,
thereto, included in the Company's latest annual report on Form 10-K. Results
for an interim period are not indicative of any future interim periods or for an
entire fiscal year.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries, all of which are wholly-owned. Intercompany balances and
transactions are eliminated in consolidation. All assets and liabilities of
foreign subsidiaries are translated into U.S. dollars using the exchange rate
prevailing at the balance sheet date, while income and expense accounts are
translated at average exchange rates during the year.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts in the financial statements and
accompanying notes. Actual results could differ from those estimates. There have
been no changes in judgments or the method of determining estimates that had a
material effect on our condensed consolidated financial statements for the
periods presented.
Fiscal Year
The Company's fiscal year ends on the last Saturday in August. For financial
reporting purposes, fiscal 2004 will have 52 weeks, as did fiscal 2003.
Revenue Recognition and Allowance for Doubtful Accounts
The Company recognizes revenue from rental operations in the period in which the
services are provided. Direct sale revenue is recognized in the period in which
the product is shipped. Judgments and estimates are used in determining the
collectability of accounts receivable. The Company analyzes specific accounts
receivable and historical bad debt experience, customer credit worthiness,
current economic trends and the age of outstanding balances when evaluating the
adequacy of the allowance for doubtful accounts. Management judgments and
estimates are used in connection with establishing the allowance in any
accounting period. Changes in estimates are reflected in the period they become
known. If the financial condition of the Company's customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required. Material differences may
5
result in the amount and timing of bad debt expense recognition for any given
period if management makes different judgments or utilizes different estimates.
Inventories and Rental Merchandise in Service
Inventories are stated at the lower of cost or market value, net of any reserve
for excess and obsolete inventory. Judgments and estimates are used in
determining the likelihood that new goods on hand can be sold to customers or
used in rental operations. Historical inventory usage and current revenue trends
are considered in estimating both excess and obsolete inventories. If actual
product demand and market conditions are less favorable than those projected by
management, additional inventory write-downs may be required. The Company uses
the last-in, first-out (LIFO) method to value a significant portion of its
inventories. Had the Company used the first-in, first-out (FIFO) accounting
method, inventories would have been approximately $1.5 million higher at
November 29, 2003, August 30, 2003 and November 30, 2002. Substantially all
inventories represent finished goods.
Rental merchandise in service is being amortized on a straight-line basis over
the estimated service lives of the merchandise, which range from 6 to 24 months.
In establishing estimated lives for merchandise in service, management considers
historical experience and the intended use of the merchandise. Material
differences may result in the amount and timing of operating profit for any
period if management makes different judgments or utilizes different estimates.
Property and Equipment
Property and equipment are recorded at cost. The Company provides for
depreciation on the straight-line method based on the following estimated useful
lives:
Buildings 30-40 years
Leasehold improvements Term of lease
Machinery and equipment 3-10 years
Motor vehicles 3-5 years
Expenditures for maintenance and repairs are expensed as incurred. Expenditures
for renewals and betterments are capitalized.
Goodwill and Other Intangible Assets
Customer contracts are amortized over their estimated useful lives which have a
weighted average life of approximately 15 years. Restrictive covenants are
amortized over the terms of the respective non-competition agreements, which
have a weighted average life of 7.5 years. In accordance with the provisions of
Statement of Financial Accounting Standards "SFAS" No. 142, the Company does not
amortize goodwill.
Income Taxes
The Company's policy of accounting for income taxes is in accordance with SFAS
No. 109 - "Accounting for Income Taxes". Deferred income taxes are provided for
temporary differences between amounts recognized for income tax and financial
reporting purposes at currently enacted tax rates. The Company computes income
tax expense by jurisdiction based on its operations in each jurisdiction.
The Company is periodically reviewed by domestic and foreign tax authorities
regarding the amount of taxes due. These reviews include questions regarding the
timing and amount of deductions and the allocation of income among various tax
jurisdictions. In evaluating the exposure associated with various filing
positions, the Company records estimated reserves for probable exposures. Based
on the Company's evaluation of current tax positions, the Company believes they
have appropriately accrued for probable exposures.
6
Net Income Per Share
Basic and diluted net income per share is calculated using the weighted average
number of common and dilutive potential common shares outstanding during the
year. The following table illustrates the amounts used in the denominator of the
calculation:
Thirteen Thirteen
weeks ended weeks ended
November 29, November 30,
2003 2002
------------ ------------
Weighted average number of shares outstanding
-- Basic 19,184 19,218
Add: effect of dilutive potential common shares -
employee common stock options 65 53
------ ------
Weighted average number of shares outstanding
- Diluted 19,249 19,271
------ ------
Stock Based Compensation
The Company adopted an incentive stock option plan (the "Plan") in November,
1996 and reserved 150,000 shares of common stock for issue under the Plan. In
January of 2002, the Company increased to 450,000 the number of shares of common
stock reserved for issuance under the Plan. Options granted under the Plan,
through May 31, 2003, are at a price equal to the fair market value of the
Company's common stock on the date of grant. Options granted prior to fiscal
2003 are subject to a proportional four-year vesting schedule. Options generally
become vested or exercisable after one year from date of grant and expire eight
years from the grant date. Options granted in fiscal 2003 and fiscal 2004 are
subject to a five-year cliff-vesting schedule under which options become vested
or exercisable after five years from date of grant and expire ten years after
the grant date.
The Company uses the intrinsic value method to account for the plans under
Accounting Principles Board No. 25, "Accounting for Stock Issued to Employees,"
under which no compensation cost has been recognized related to Stock option
grants. The Company has adopted the disclosure provisions of SFAS No. 148
"Accounting for Stock-Based Compensation - Transition and Disclosure". Had
compensation cost for this plan been determined consistent with SFAS No. 123,
the Company's net income and earnings per share would have been reduced to the
following pro forma amounts for the following periods:
Thirteen Thirteen
weeks ended weeks ended
November 29, November 30,
2003 2002
------------ ------------
Income before cumulative effect of accounting change $ 9,523 $ 8,665
Less: pro forma compensation expense, net of tax (48) (34)
--------- ---------
Pro forma income before cumulative effect of accounting change 9,475 8,631
Cumulative effect of accounting change, net of tax -- (2,242)
--------- ---------
Pro forma net income $ 9,475 $ 6,389
========= =========
Basic net income per weighted average common share, as reported:
Income before cumulative effect of accounting change $ 0.50 $ 0.45
Cumulative effect of accounting change, net of tax -- (0.12)
--------- ---------
Net income per share $ 0.50 $ 0.33
========= =========
Basic net income per weighted average common share, pro forma:
Pro forma income before cumulative effect of accounting change $ 0.49 $ 0.45
Cumulative effect of accounting change, net of tax -- (0.12)
--------- ---------
Pro forma net income per share $ 0.49 $ 0.33
========= =========
Diluted net income per weighted average common share, as reported:
Income before cumulative effect of accounting change $ 0.49 $ 0.45
Cumulative effect of accounting change, net of tax -- (0.12)
--------- ---------
Net income per share $ 0.49 $ 0.33
========= =========
Diluted net income per weighted average common share, pro forma:
Pro forma income before cumulative effect of accounting change $ 0.49 $ 0.45
Cumulative effect of accounting change, net of tax -- (0.12)
--------- ---------
Pro forma net income per share $ 0.49 $ 0.33
========= =========
7
Cash and Cash Equivalents
Cash and cash equivalents include cash in banks and bank short-term investments
with maturities of less than ninety days.
Financial Instruments
The Company's financial instruments, which may expose the Company to
concentrations of credit risk, include cash and cash equivalents, receivables,
accounts payable, notes payable and long-term obligations. Each of these
financial instruments is recorded at cost, which approximates its fair value.
Insurance
The Company self-insures for certain obligations related to health, workers'
compensation, vehicles and general liability programs. The Company also
purchases stop-loss insurance policies to protect it from catastrophic losses.
Judgments and estimates are used in determining the potential value associated
with reported claims and for losses that have occurred, but have not been
reported. The Company's estimates consider historical claims experience and
other factors. The Company's liabilities are based on estimates, and, while the
Company believes that the accrual for loss is adequate, the ultimate liability
may be in excess of or less than the amounts recorded. Changes in claim
experience, the Company's ability to settle claims or other estimates and
judgments used by management could have a material impact on the amount and
timing of expense for any period.
Environmental and Other Contingencies
The Company is subject to legal proceedings and claims arising from the conduct
of their business operations, including environmental matters, personal injury,
customer contract matters, employment claims. Accounting principles generally
accepted in the United States require that a liability for contingencies be
recorded when it is probable that a liability has occurred and the amount of the
liability can be reasonably estimated. Significant judgment is required to
determine the existence of a liability, as well as the amount to be recorded.
The Company regularly consults with attorneys and outside consultants to ensure
that all of the relevant facts and circumstances are considered, before a
contingent liability is recorded. The Company records accruals for environmental
and other contingencies based on enacted laws, regulatory orders or decrees, the
Company's estimates of costs, insurance proceeds, participation by other parties
and the timing of payments, and the input of outside consultants and attorneys.
The estimated liability for environmental contingencies has been discounted
using credit-adjusted risk-free rates of interest that range from approximately
4.0% to 5.0% over periods ranging from fifteen to thirty years. The estimated
current costs, net of legal settlements with insurance carriers, have been
adjusted for the estimated impact of inflation at 3% per year. Changes in
enacted laws, regulatory orders or decrees, management's estimates of costs,
insurance proceeds, participation by other parties and the timing of payments,
and the input of outside consultants and attorneys could have a material impact
on the amounts recorded for environmental and other contingent liabilities.
Reclassifications
Certain prior year amounts have been reclassified to conform with current year
presentation.
Comprehensive Income
The components of comprehensive income for the thirteen week periods ended
November 29, 2003 and November 30, 2002, respectively, were as follows:
Thirteen weeks Thirteen weeks
ended ended
November 29, November 30,
2003 2002
-------------- --------------
Net income $ 9,523 $ 6,423
Other comprehensive income (loss):
Foreign currency translation adjustments 1,193 (13)
Change in fair value of derivative instruments, net -- 59
------- -------
Comprehensive income $10,716 $ 6,469
======= =======
8
2. Acquisition/Revolving Senior Credit Facility
On September 2, 2003 ("Closing Date"), the Company completed its acquisition of
100% of Textilease Corporation ("Textilease"). The purchase price of
approximately $175.6 million in cash was financed as part of a new $285 million
unsecured revolving credit agreement ("Credit Agreement"), with a syndicate of
banks. The Credit Agreement, completed on the Closing Date, replaces the
Company's previous $125 million unsecured revolving credit agreement and is due
on the third anniversary of the Closing Date (September 2, 2006). Availability
of credit requires compliance with financial and other covenants, including
maximum leverage, minimum fixed charge coverage, and minimum tangible net worth,
as defined in the Credit Agreement.
Textilease, headquartered in Beltsville, Maryland, had fiscal year 2002 revenues
of approximately $95 million. It services over 25,000 uniform and textile
products customers from 12 locations in six southeastern states, and also
services a wide range of large and small first-aid service customers from
additional specialized facilities. Textilease's operating results have been
included in the Company's consolidated operating results since September 2,
2003.
The following is a summary of the Company's preliminary estimate of the
estimated fair values of the assets acquired and liabilities assumed at the date
of acquisition. The Company has engaged a third party to appraise the fair value
of the acquired tangible and intangible assets. The results of the appraisal
report are preliminary at this time. The final results of the appraisal may
differ from the preliminary estimate of the fair value of the acquired tangible
and intangible assets. The Company is also completing its analysis of the fair
values of the liabilities assumed in connection with the acquisition, including
certain liabilities that qualify for recognition under Emerging Issues Task
Force 95-3 "Recognition of Liabilities in connection with a Purchase Business
Combination". The Company will finalize the purchase price allocation after it
receives the final appraisal report, completes its analysis of assumed
liabilities, and receives other relevant information relating to the
acquisition. The final purchase price allocation may be significantly different
than the Company's preliminary estimate as presented below.
Assets:
Current
assets $ 31,938
Property and equipment 23,826
Goodwill 117,504
Intangible assets subject to amortization (estimated fifteen year weighted-average useful life): 35,469
---------
Total assets acquired $ 208,737
=========
Liabilities:
Current liabilities $ 17,300
Deferred compensation 5,249
Deferred income taxes 8,555
Long-term debt 2,005
---------
Total liabilities assumed $ 33,109
---------
Net assets acquired $ 175,628
=========
The $117.5 million of goodwill will be assigned to our only reportable segment,
that being the design, rental, cleaning and delivery of occupational garments,
industrial wiper towels, floor mats and other non-garment items. None of the
goodwill is expected to be deductible for income tax purposes.
At the time of acquisition, management approved a plan to integrate certain
Textilease facilities into existing operations. Included in the purchase price
allocation is a restructuring charge of approximately $6.5 million, which
includes approximately $3.1 million in severance-related costs for corporate and
field employees and $3.4 million in facility closing and lease cancellation
costs. Through November 29, 2003, the Company paid and charged $467 against this
accrual for severance-related costs. The Company expects to incur substantially
all of the remaining costs within twenty-four months of the acquisition date.
Supplemental Pro Forma Information
The unaudited pro forma combined condensed statement of income for the thirteen
weeks ended November 30, 2002 gives effect to the acquisition of Textilease and
related financing as if the Textilease acquisition and the related financing had
occurred on August 31, 2002. The unaudited pro forma combined condensed
statement of income for the thirteen weeks ended November 30, 2002, includes the
unaudited condensed consolidated statement of income of UniFirst for the
thirteen weeks ended November 30, 2002, and the unaudited statement of
operations of Textilease for the three months ended December 31, 2002, and pro
forma adjustments to reflect the Textilease acquisition and the related
financing. Textilease previously had a fiscal year ending on December 31.
The pro forma adjustments include additional interest expense of approximately
$1,285 related to the debt used to finance the acquisition, additional
depreciation and amortization of approximately $524 related to the estimated
increase to the fair value of property and equipment and intangible assets and
the related income tax effect of approximately $723.
The unaudited pro forma combined condensed statement of income is not
necessarily indicative of the financial results that would have occurred if the
Textilease acquisition and the related financing had been consummated on August
31, 2002, nor are they necessarily indicative of the financial results which may
be attained in the future.
The pro forma statement of income is based upon available information and upon
certain assumptions that UniFirst's management believes are reasonable. The
Textilease acquisition is being accounted for using the purchase method of
accounting. The allocation of the purchase price is preliminary. Final amounts
could differ from those reflected in the pro forma statement of income, and such
differences could be significant.
Thirteen weeks Thirteen weeks Thirteen weeks
ended ended ended
November 29, November 30, November 30,
2003 2002 2002
(Actual) (Actual) (Pro Forma)
Revenues $ 180,898 $ 149,179 $ 172,401
Income before extraordinary items and
cumulative effect of accounting change $ 9,523 $ 8,665 $ 7,288
Cumulative effect of accounting
change, net of tax -- 2,242 2,242
----------- ----------- -----------
Net Income $ 9,523 $ 6,423 $ 5,046
=========== =========== ===========
Net Income Per Share:
Weighted average number of shares -
basic 19,184 19,218 19,218
=========== =========== ===========
Weighted average number of shares -
diluted 19,249 19,271 19,271
=========== =========== ===========
Net income per share --Basic
Income before cumulative effect of
accounting change $ 0.50 $ 0.45 $ 0.38
Cumulative effect of accounting
change, net -- (0.12) (0.12)
----------- ----------- -----------
Net income per share - basic $ 0.50 $ 0.33 $ 0.26
=========== =========== ===========
Net income per share -- Diluted
Income before cumulative effect of
accounting change $ 0.49 $ 0.45 $ 0.38
Cumulative effect of accounting
change, net -- (0.12) (0.12)
----------- ----------- -----------
Net income per share - diluted $ 0.49 $ 0.33 $ 0.26
=========== =========== ===========
9
3. Asset Retirement Obligations
Effective September 1, 2002, the Company adopted the provisions of SFAS No. 143,
"Accounting for Asset Retirement Obligations." SFAS No. 143 generally applies to
legal obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development and/or the normal
operation of a long-lived asset. Under the new accounting method, the Company
now recognizes asset retirement obligations in the period in which they are
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset.
As of September 1, 2002, the Company recognized as a liability the present value
of the estimated future costs to decommission its nuclear laundry facilities in
accordance with the provisions of SFAS No. 143. The adoption of SFAS No. 143
resulted in a cumulative charge of $2.2 million, net of tax benefit of $1.4
million, related to the change in accounting principle, the recognition of a
discounted asset retirement obligation of $5.3 million, and an increase of $2.4
million to the gross carrying value of the related long-lived assets ($900,000,
net of accumulated depreciation of $1.5 million). The Company will depreciate,
on a straight-line basis, the amount added to property and equipment and
recognize accretion expense in connection with the discounted liability over the
various remaining lives which range from approximately one to thirty years.
The estimated liability has been based on historical experience in
decommissioning nuclear laundry facilities, estimated useful lives of the
underlying assets, external vendor estimates as to the cost to decommission
these assets in the future and federal and state regulatory requirements. The
estimated current costs have been adjusted for the estimated impact of inflation
at 3% per year. The liability has been discounted using credit-adjusted
risk-free rates that range from approximately 3.00% - 7.25% over one to thirty
years. Revisions to the liability could occur due to changes in the Company's
estimated useful lives of the underlying assets, estimated dates of
decommissioning, changes in decommissioning costs, changes in federal or state
regulatory guidance on the decommissioning of such facilities, or other changes
in estimates. Changes due to revised estimates will be recognized by increasing
or decreasing the carrying amount of the liability and the carrying amount of
the related long-lived asset.
In fiscal year 2003, the Company began decommissioning one of the nuclear
laundry facilities for which it had recognized an asset retirement obligation.
Costs incurred in connection with the decommissioning for the thirteen weeks
ended November 29, 2003 were approximately $278. As of November 29, 2003, the
Company believes this current decommissioning project will be completed by the
end of fiscal 2004.
A reconciliation of the Company's liability for the year ended November 29,
2003, is as follows:
Balance at August 30, 2003 $ 7,060
Accretion expense 96
Asset retirement costs incurred (278)
-------
Balance at November 29, 2003 $ 6,878
=======
As of November 29, 2003, the $6.9 million asset retirement obligation is
included in accrued liabilities in the accompanying condensed consolidated
balance sheet.
10
4. Derivative Instruments and Hedging Activities
The Company has entered into interest rate swap agreements to manage its
exposure to movements in interest rates on its variable rate debt. The Company
accounts for these agreements in accordance with SFAS No. 133, as amended,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133").
The swap agreements are cash flow hedges and are used to manage exposure to
interest rate movement by effectively changing the variable rate to a fixed
rate. Such instruments are matched with the underlying borrowings. SFAS No. 133
eliminates special hedge accounting if a swap agreement does not meet certain
criteria, thus requiring the Company to reflect all changes in the fair value of
the swap agreement in earnings in the period of change.
In October 1999, the Company entered into an interest rate swap agreement,
notional amount $40,000 ("the $40,000 SWAP"), maturing October 13, 2004. The
Company pays a fixed rate of 6.38% and receives a variable rate tied to the
three month LIBOR rate. As of August 30, 2003, the applicable variable rate was
1.11%. On October 15, 2002, the bank had the option to terminate the $40,000
SWAP without further obligation to make payments to the Company. The bank did
not exercise this option. Because of the existence of this termination option,
the $40,000 SWAP did not meet the required criteria to qualify as a cash flow
hedge and use special hedge accounting, under SFAS No. 133. Accordingly, the
Company has recorded, in the interest rate swap income line item of its
consolidated statements of income, income of $480 and income of $209 for the
thirteen weeks ended November 29, 2003 and the thirteen weeks ended November 30,
2002, respectively, for the changes in the fair value of $40,000 SWAP.
In June 2001, the Company entered into a second interest rate swap agreement
with a notional amount of $20,000 ("the $20,000 SWAP"), maturing June 5, 2003.
The Company paid a fixed rate of 4.69% and received a variable rate tied to the
three month LIBOR rate. At maturity, the applicable variable rate was 1.34%. The
$20,000 SWAP met the required criteria as defined in SFAS No. 133 to use special
hedge accounting. The Company recorded, through the other comprehensive loss
section of shareholders' equity, income of $59, net of tax of $37 for the
thirteen weeks ended November 30, 2002, for the change in the fair value in the
$20,000 SWAP. Since the $20,000 SWAP matured on June 5, 2003, there was no
change in fair value in the $20,000 SWAP recorded in the thirteen weeks ended
November 29, 2003.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- FOR THE THIRTEEN WEEKS ENDED NOVEMBER 29, 2003
Critical Accounting Policies and Estimates
The Company believes the following critical accounting policies reflect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts in the financial statements and
accompanying notes. Actual results could differ from those estimates. There have
been no changes in judgments or estimates that had a material effect on our
condensed consolidated financial statements for the periods presented.
Revenue Recognition and Allowance for Doubtful Accounts
The Company recognizes revenue from rental operations in the period in which the
services are provided. Direct sale revenue is recognized in the period in which
the product is shipped. Judgments and estimates are used in determining the
collectability of accounts receivable. The Company analyzes specific accounts
receivable and historical bad debt experience, customer credit worthiness,
current economic trends and the age of outstanding balances when evaluating the
adequacy of the allowance for doubtful accounts. Management judgments and
estimates are used in connection with establishing the allowance in any
accounting period. Changes in estimates are reflected in the period they become
known. If the financial condition of the Company's customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required. Material differences may result in the
amount and timing of bad debt expense recognition for any given period if
management makes different judgments or utilizes different estimates.
Inventories and Rental Merchandise in Service
Inventories are stated at the lower of cost or market value, net of any reserve
for excess and obsolete inventory. Judgments and estimates are used in
determining the likelihood that new goods on hand can be sold to customers or
used in rental operations. Historical inventory usage and current revenue trends
are considered in estimating both excess and obsolete inventories. If actual
product demand and market conditions are less favorable than those projected by
management, additional inventory write-downs may be required. The Company uses
the last-in, first-out (LIFO) method to value a significant portion of its
inventories. Substantially all inventories represent finished goods.
Rental merchandise in service is being amortized on a straight-line basis over
the estimated service lives of the merchandise, which range from 6 to 24 months.
In establishing estimated lives for merchandise in service, management considers
historical experience and the intended use of the merchandise. Material
differences may result in the amount and timing of operating profit for any
period if management makes different judgments or utilizes different estimates.
Insurance
The Company self-insures for certain obligations related to health, workers'
compensation, vehicles and general liability programs. The Company also
purchases stop-loss insurance policies to protect it from catastrophic losses.
Judgments and estimates are used in determining the potential value associated
with reported claims and for losses that have occurred, but have not been
reported. The Company's estimates consider historical claim experience and other
factors. The Company's liabilities are based on estimates, and, while the
Company believes that the accrual for loss is adequate, the ultimate liability
may be in excess of or less than the amounts recorded. Changes in claim
experience, the Company's ability to settle claims or other estimates and
judgments used by management could have a material impact on the amount and
timing of expense for any period.
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Environmental and Other Contingencies
The Company is subject to legal proceedings and claims arising from the conduct
of their business operations, including environmental matters, personal injury,
customer contract matters, employment claims. Accounting principles generally
accepted in the United States require that a liability for contingencies be
recorded when it is probable that a liability has occurred and the amount of the
liability can be reasonably estimated. Significant judgment is required to
determine the existence of a liability, as well as the amount to be recorded.
The Company regularly consults with attorneys and outside consultants to ensure
that all of the relevant facts and circumstances are considered, before a
contingent liability is recorded. The Company records accruals for environmental
and other contingencies based on enacted laws, regulatory orders or decrees, the
Company's estimates of costs, insurance proceeds, participation by other parties
and the timing of payments, and the input of outside consultants and attorneys.
The estimated liability for environmental contingencies has been discounted
using credit-adjusted risk-free rates of interest that range from approximately
4.0% to 5.0% over periods ranging from fifteen to thirty years. The estimated
current costs, net of legal settlements with insurance carriers, have been
adjusted for the estimated impact of inflation at 3% per year. Changes in
enacted laws, regulatory orders or decrees, management's estimates of costs,
insurance proceeds, participation by other parties and the timing of payments,
and the input of outside consultants and attorneys could have a material impact
on the amounts recorded for environmental and other contingent liabilities.
Income Taxes
The Company's policy of accounting for income taxes is in accordance with SFAS
No. 109 - "Accounting for Income Taxes". Deferred income taxes are provided for
temporary differences between amounts recognized for income tax and financial
reporting purposes at currently enacted tax rates. The Company computes income
tax expense by jurisdiction based on its operations in each jurisdiction.
The Company is periodically reviewed by domestic and foreign tax authorities
regarding the amount of taxes due. These reviews include questions regarding the
timing and amount of deductions and the allocation of income among various tax
jurisdictions. In evaluating the exposure associated with various filing
positions, the Company records estimated reserves for probable exposures, in
accordance with SFAS No. 5 - "Accounting for Contingencies". Based on the
Company's evaluation of current tax positions, the Company believes it has
appropriately accrued for probable exposures.
Asset Retirement Obligations
Effective September 1, 2002, the Company adopted the provisions of SFAS No. 143,
"Accounting for Asset Retirement Obligations." SFAS No. 143 generally applies to
legal obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development and/or the normal
operation of a long-lived asset. Under the new accounting method, the Company
now recognizes asset retirement obligations in the period in which they are
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset. The Company will depreciate, on a straight-line basis, the
amount added to property and equipment and recognize accretion expense in
connection with the discounted liability over the various remaining lives which
range from approximately one to thirty years.
The estimated liability has been based on historical experience in
decommissioning nuclear laundry facilities, estimated useful lives of the
underlying assets, external vendor estimates as to the cost to decommission
these assets in the future and federal and state regulatory requirements. The
estimated current costs have been adjusted for the estimated impact of inflation
at 3% per year. The liability has been discounted using credit-adjusted
risk-free rates that range from approximately 3.00% - 7.25% over one to thirty
years. Revisions to the liability could occur due to changes in the Company's
estimated useful lives of the underlying assets, estimated dates of
decommissioning, changes in decommissioning costs, changes in federal or state
regulatory guidance on the decommissioning of such facilities, or other changes
in estimates. Changes due to revised estimates will be recognized by increasing
or decreasing the carrying amount of the liability and the carrying amount of
the related long-lived asset.
13
Results of Operations
Thirteen weeks ended November 29, 2003 Compared with Thirteen Weeks Ended
November 30, 2002
Revenues. Revenues for the thirteen weeks ended November 29, 2003 increased
21.3% to $180.9 million as compared with $149.2 million for the thirteen weeks
ended November 30, 2002. This increase can be attributed to acquisitions,
primarily Textilease (16.3%), growth from existing operations and price
increases in the core uniform rental business (5.1%), and growth from existing
operations in the first aid business (0.1%), offset by decreased revenue from
the UniTech garment services business (0.2%).
Operating costs. Operating costs increased to $115.1 million for the thirteen
weeks ended November 29, 2003 as compared with $92.7 million for the thirteen
weeks ended November 30, 2002. As a percentage of revenues, operating costs
increased to 63.6% from 62.1% for these periods. This increase is primarily due
to increased merchandise amortization costs resulting from the Textilease
acquisition, as well as generally higher production costs related to the
Textilease laundries.
Selling and administrative expenses. The Company's selling and administrative
expenses increased to $36.8 million, or 20.4% of revenues, for the thirteen
weeks ended November 29, 2003 as compared with $31.9 million, or 21.4% of
revenues, for the thirteen weeks ended November 30, 2002. The increase in
selling and administrative expenses was primarily related to the acquisition of
Textilease. The decrease in selling and administrative expenses as a percent of
revenues is primarily attributable to the closure of Textilease's corporate
office as well as relatively fewer salespersons as a function of the combined
operations.
Depreciation and amortization. The Company's depreciation and amortization
expense increased to $11.0 million, or 6.1% of revenues, for the thirteen weeks
ended November 29, 2003, as compared with $9.9 million, or 6.6% of revenues, for
the thirteen weeks ended November 30, 2002. The increase in depreciation and
amortization expense was primarily related to the Textilease acquisition offset
by certain intangible assets becoming fully amortized during fiscal 2003. The
decrease in depreciation and amortization expense as a percent of revenues is
due to relatively lower depreciation costs as a percentage of the increased
revenue from the Textilease acquisition and certain intangible assets related to
an acquisition in 1986 becoming fully amortized during fiscal 2003.
Other expense (income). Net other expense (interest expense, interest rate swap
income and interest income) was $2.5 million, or 1.4% of revenues, for the
thirteen weeks ended November 29, 2003 as compared with $0.6 million, or 0.4% of
revenues, for the thirteen weeks ended November 30, 2002. The increase in net
other expense was a result of the increased debt due to the acquisition of
Textilease, offset by an increase in the fair value of the $40,000 SWAP, which
was $0.5 million of income for the thirteen weeks ended November 29, 2003 as
compared with $0.2 million of income for the thirteen weeks ended November 30,
2002.
Provision for Income Taxes. The Company's effective income tax rate was 38.5%
for the thirteen weeks ended November 29, 2003 and the thirteen weeks ended
November 30, 2002.
Liquidity and Capital Resources
Shareholders' equity at November 29, 2003 was $345.6 million, or 59% of the
Company's total capitalization.
Net cash provided by operating activities was $22.9 million in the thirteen
weeks ended November 29, 2003 as compared to net cash provided by operating
activities of $20.2 million in the thirteen weeks ended November 30, 2002. The
increase is primarily related to the Company's increased profitability. These
cash flows were used primarily to fund $6.7 million in capital expenditures to
expand and update Company facilities as well as reduce outstanding debt by $9.6
million. The Company increased its debt by approximately $177.3 million in the
thirteen weeks ended November 29, 2003, primarily to complete its acquisition of
Textilease.
As of November 29, 2003, the Company had $8.0 million in cash and cash
equivalents and $30.1 million available under its $285.0 million unsecured line
of credit with a syndicate of banks, net of outstanding borrowings of $234.8
million and standby irrevocable bank commercial letters of credit of $20.1
million. The Company believes its cash generated from operations and its
borrowing capacity will adequately cover its foreseeable capital requirements.
Seasonality
Historically, the Company's revenues and operating results have varied from
quarter to quarter and are expected to continue to fluctuate in the future.
These fluctuations have been due to a number of factors, including: general
economic conditions in the
14
Company's markets; the timing of acquisitions and of commencing start-up
operations and related costs; the effectiveness of integrating acquired
businesses and start-up operations; the timing of nuclear plant outages; capital
expenditures; seasonal rental and purchasing patterns of the Company's
customers; and price changes in response to competitive factors. In addition,
the Company's operating results historically have been lower during the second
and fourth fiscal quarters than during the other quarters of the fiscal year.
The operating results for any historical quarter are not necessarily indicative
of the results to be expected for an entire fiscal year or any other interim
periods.
Effects of Inflation
Inflation has had the effect of increasing the reported amounts of the Company's
revenues and costs. The Company uses the last-in, first-out (LIFO) method to
value a significant portion of inventories. This method tends to reduce the
amount of income due to inflation included in the Company's results of
operations. The Company believes that, through increases in its prices and
productivity improvements, it has been able to recover increases in costs and
expenses attributable to inflation.
SAFE HARBOR FOR FORWARD LOOKING STATEMENTS
Forward looking statements contained in this quarterly report are subject to the
safe harbor created by the Private Securities Litigation Reform Act of 1995 and
are highly dependent upon a variety of important factors that could cause actual
results to differ materially from those reflected in such forward looking
statements. Such factors include uncertainties regarding the Company's ability
to consummate and successfully integrate acquired businesses, uncertainties
regarding any existing or newly-discovered expenses and liabilities related to
environmental compliance and remediation, the Company's ability to compete
successfully without any significant degradation in its margin rates, seasonal
fluctuations in business levels, uncertainties regarding the price levels of
natural gas, electricity, fuel, and labor, the impact of negative economic
conditions on the Company's customers and such customer's workforce, the
continuing increase in domestic healthcare costs, demand and prices for the
Company's products and services, the impact of interest rate variability upon
the Company's interest rate swap arrangements, additional professional and
internal costs necessary for compliance with recent and proposed future changes
in Securities and Exchange Commission (including the Sarbanes-Oxley Act of
2002), New York Stock Exchange, and accounting rules, strikes and unemployment
levels, the Company's efforts to evaluate and potentially reduce internal costs,
economic and other developments associated with the war on terrorism and its
impact on the economy and general economic conditions. When used in this
quarterly report, the words "intend," "anticipate," "believe," "estimate," and
"expect" and similar expressions as they relate to the Company are included to
identify such forward looking statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Exchange Risk
Management has determined that all of the Company's foreign subsidiaries operate
primarily in local currencies that represent the functional currencies of the
subsidiaries. All assets and liabilities of foreign subsidiaries are translated
into U.S. dollars using the exchange rate prevailing at the balance sheet date,
while income and expense accounts are translated at average exchange rates
during the year. As such, the Company's operating results are affected by
fluctuations in the value of the U.S. dollar as compared to currencies in
foreign countries, as a result of the Company's transactions in these foreign
markets. The Company does not operate a hedging program to mitigate the effect
of a significant rapid change in the value of the Canadian Dollar, Euro or
Mexican Peso as compared to the U.S. dollar. If such a change did occur, the
Company would have to take into account a currency exchange gain or loss in the
amount of the change in the U.S. dollar denominated balance of the amounts
outstanding at the time of such change. While the Company does not believe such
a gain or loss is likely, and would not likely be material, there can be no
assurance that such a loss would not have an adverse material effect on the
Company's results of operations or financial condition.
Interest Rate Risk
The Company is exposed to market risk from changes in interest rates which may
adversely affect its financial position, results of operations and cash flows.
In seeking to minimize the risks from interest rate fluctuations, the Company
manages exposures through its regular operating and financing activities. The
Company is exposed to interest rate risk primarily through its borrowings under
its $285 million unsecured line of credit with a syndicate of banks. Under the
line of credit, the Company may borrow funds at variable interest rates based on
the Eurodollar rate or the bank's money market rate, as selected by the Company.
As of November 29, 2003, the Company's outstanding debt approximates its
carrying value.
The Company has entered into a $40 million interest rate swap agreement to
manage its exposure to movements in interest rates on its variable rate debt.
The swap agreement is a cash flow hedge and is used to manage exposure to
interest rate movement by effectively changing
15
the variable rate to a fixed rate. Such instruments are matched with the
underlying borrowings. The effective portion of the cash flow hedge is recorded
within the other comprehensive loss section of shareholders' equity in the
period of change in fair value. The ineffective portion of the cash flow hedge
is charged to the Company's consolidated statement of income in the period of
change in fair value.
The Company is evaluating alternatives to manage its exposure to movements in
interest rates on its variable rate debt related to the Credit Agreement.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures. As required by Rule 13a-15 under the
Securities Exchange Act of 1934 (the "Exchange Act"), the Company carried out an
evaluation under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures as of the end of the period covered by this
report. Based upon their evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective to ensure that material information relating to the
Company required to be disclosed by us in reports we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules and forms. In
designing and evaluating the disclosure controls and procedures, the Company's
management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurances of achieving the
desired control objectives, and management necessarily was required to apply its
judgment in designing and evaluating the controls and procedures. The Company
currently is in the process of further reviewing and documenting its disclosure
controls and procedures, and its internal control over financial reporting, and
may from time to time make changes aimed at enhancing their effectiveness and to
ensure that our systems evolve with our business.
Changes in Internal Control Over Financial Reporting. There were no changes in
our internal control over financial reporting during the first quarter of fiscal
year 2004 that have materially affected, or that are reasonably likely to
materially affect our internal controls over financial reporting.
Part II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
* 31.1 Rule 13a-14(a)/15d-14(a) certification of Ronald D. Croatti
* 31.2 Rule 13a-14(a)/15d-14(a) certification of John B. Bartlett
** 32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes
Oxley Act of 2002
** 32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes
Oxley Act of 2002
* Filed herewith
** Furnished herewith
(b) Reports on Form 8-K:
On September 17, 2003, the Company filed a Current Report on Form 8-K to report
information pursuant to Item 2. Acquisition or Disposition of Assets in
connection with the Company's completion on September 2, 2003 of its acquisition
of the business and assets of Textilease Corporation. The Company attached as
Exhibit 2.1 to the Current Report a Stock Purchase Agreement, dated as of July
17, 2003, by and among UniFirst Corporation and all of the stockholders of
Textilease Corporation.
On November 4, 2003, the Company furnished a Current Report on Form 8-K to
report information pursuant to Item 12 - Results of Operations and Financial
Condition. The Company attached as Exhibit 99.1 to the Current Report the
Company's press release announcing financial results for the fiscal year ended
August 30, 2003.
16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
UniFirst Corporation
January 13, 2004 By: /s/ Ronald D. Croatti
-----------------------
Ronald D. Croatti
President and Chief Executive Officer
UniFirst Corporation
January 13, 2004 By: /s/ John B. Bartlett
----------------------
John B. Bartlett
Senior Vice President and Chief Financial Officer
EXHIBIT INDEX
DESCRIPTION
* 31.1 Rule 13a-14(a)/15d-14(a) certification of Ronald D. Croatti
* 31.2 Rule 13a-14(a)/15d-14(a) certification of John B. Bartlett
** 32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002
** 32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002
* Filed herewith
** Furnished herewith
17